When someone expects a lot from you, it might either put a lot of pressure on your performance or even your best might not please them. This is actually what is happening with Qualcomm (QCOM) because despite stellar top and bottom line growth at nearly 24% year-on-year in the last five years, the stock has appreciated just 15%. But Qualcomm still looks good for the long run.

Outlook

Qualcomm’s license business’ revenue and profits will fall when developed markets shift to 4G, as it would earn 3.3% royalty on 4G/LTE, while it earns a 5% royalty for 3G. The bright side remains that the complete transition from 3G to 4G/LTE will take at least a couple of years in the developed markets. Moreover, the need to backward-integrate will provide Qualcomm with ample opportunities in developing countries as they are shifting to 3G now.

The company’s margins have reduced, but its superior business and market dominance cannot be challenged. It held nearly 86% of the total market for LTE chipsets in 2012 and continues the same dominance this year too with its first ever LTE-Advanced smartphone, the Samsung Galaxy S4 LTE-A, launched in late June. The new Galaxy S4 LTE-A, utilizing LTE carrier aggregation, will offer data rates up to 150 Mbps, thereby offering twice the current LTE speeds.

Qualcomm’s Snapdragon 800 processors are designed to hold up LTE carrier aggregation without affecting the battery life. Snapdragon 800 is expected to go into commercial position soon and is expected to feature in 200 phones and tablets to be released later this year. The company is well ahead of competition as the MDM 9X25 and Snapdragon 800 chipsets are its third generation of LTE modems, while most of the competitors are still struck with the first generation. Being well ahead of competition and the only provider of LTE-Advanced features, Qualcomm is poised to perform in the growing smartphone market.

The only close competitor to Snapdragon 800 is NVIDIA (NVDA)'s fourth generation Tegra chips, Tegra 4i, which are expected to be launched in the beginning of next year, and Broadcom’s (BRCM) recently launched BCM21892. The Tegra 4i will be half the size of Snapdragon 800 processor and BCM21892 is currently the smallest LTE 4G enabled chip in the industry. The smaller size of the chips makes them cheaper to produce and more energy efficient. However, Qualcomm’s earlier launch of its Snapdragon 800 processor with an LTE –Advanced feature places it in an advantageous position, as there is no other competing product.

However, NVIDIA's attempt to speed up the launch of Tegra 4i delayed the launch of Tegra 4, which forced the company to continue with Tegra 3, a comparatively outdated product compared to its competitors. The delay cost the company a number of design wins too. Further, Tegra 4i does not offer any great hardware upgrades from the Tegra 3, which might cost the company heavily, as in the tech sector, innovation is the key to success.

On the other hand, Broadcom's chip forms an integral part in both Samsung and Apple's devices, which provides certainty to its future revenue. Further, it is continuously putting tremendous efforts into forming partnerships with local carriers and handset makers in emerging markets, especially China. There is no doubt of the potential that China offers, and going forward Broadcom is expected to be benefited from its operations there.

What About 5G?

Broadcom is the first company to initiate a 5G WiFi combo chip for smartphones, tablets and other mobile devices. The company is bidding on the 802.11ac standard for every chief WiFi product segment. The 5G technology offers significant increases in WiFi coverage and transfer speeds, with considerably less power consumption, which enhances the efficiency to about six times the current levels. Entry into the 5G market should work in Broadcom’s advantage in the long run, making it a good bet.

Final Words

With a short-term view, if we see Qualcomm’s performance year to date, its stock price has remained almost flat, but it has provided opportunities to gain from stock price volatility. Even after it reported its last earnings, its shares fell over 10% in two days despite strong performance by the company, which I believe was a good buying opportunity keeping in view the growth that Qualcomm offers in the long term.

Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC.
Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.